242 ACCOUNTING FOR MANAGERS
Conclusion
In this chapter, we have described budgetary control through flexible budgets,
variance analysis and cost control. There are, however, concerns about how well
these techniques are able to contribute to organizational effectiveness in practice.
In his landmark study, Hopwood (1973) found that despite the sophistication of
management accounting systems, they failed to contribute to achieving effective
operations. Although managers:
made extensive use of the accounting information, they did so in a rigid
manner, either attributing too much validity to the information or being
unaware of its intended purposes, with the result that again, despite the
thought and consideration which went into the design and operation of the
system, its final value was questionable. (p. 185)Hopwood differentiated three styles of evaluation of budget information. The
budget-constrained manager is evaluated based on the ability to meet the budget
continually on a short-term basis. The profit-conscious manager is evaluated on
the basis of the ability to increase the general effectiveness of operations to meet
long-term objectives. In the non-accounting style, accounting information plays
little part in the evaluation of a manager’s performance.
A manager who adopts a budget-constrained style takes budget information
at face value, has a short time horizon, considering each month’s variances in
isolation rather than the trend or the long-term implications. An unfavourable
budget variance is an indicator of poor management performance, even though
the standards used by the accounting system may be faulty.
By contrast, managers adopting a profit-conscious style realize that accounting
information is not a constraint, and that variances are a meaningful guide to action,
even though they may be misleading. The profit-conscious manager is more likely
to experiment and innovate even though cost may exceed budget in the short term.
AsurveybyArmstronget al.(1996) found that accounting controls were not as
evident in business units and that ‘whether or not to use any or all of the apparatus
of management accounting is a managerial choice largely devoid of consequences’
(p. 20).
Samuelson (1986) argued that ‘senior management often articulate one role for
the budget but budgetees then perceive that another very different role may be
intended’ (p. 35). Samuelson contrasted the ‘role articulated’ by management for
budgetary control (planning), which may be different to the ‘real role’ and the
‘role intended’ by managers (responsibility).
References............................................
Armstrong, P., Marginson, P., Edwards, P. and Purcell, J. (1996). Budgetary control and the
labour force: Findings from a survey of large British companies.Management Accounting
Research, 7(1), 1 – 24.